Securities & instruments
What is ISO (Incentive Stock Option)?
Tax-favored employee stock options. No regular income tax at exercise, but spread is AMT preference; long-term capital gains on sale if holding requirements met.
ISOs are stock options that, when held according to specific rules, qualify for long-term capital gains treatment on the entire gain - not just the appreciation after exercise. The rules: hold the shares at least 2 years from grant AND 1 year from exercise. Tax treatment at exercise: no regular income tax (the spread is an AMT preference item, often triggering meaningful AMT). At qualifying sale: long-term capital gains on (sale price - strike). If you violate the holding rules (a 'disqualifying disposition'), the ISO treatment reverts to NSO-like ordinary income on the spread.